Monday, March 14, 2016

Musings 15 March 2016

I came across a good book recently- Aurora by Kim Stanley Robinson. You can get a synopsis from various sources online including the link to Amazon. The author tends to get quite descriptive and it is a characteristic of this particular author that readers will have to come to terms with. The reason why I am always partial to this author is that he always presents big interesting thought stimulating ideas.  Aurora is a reminder that I should reread his previous books to refresh or gain new perspectives.

Before you read on further, just be aware that this blog post contains SPOILERS. To avoid ruining your enjoyment of the book, you should stop here and read the book first before reading on.

The main proposition from the book is that interstellar travel and colonisation are extremely difficult, and quite likely much more difficult than what we would like to believe at present. For various reasons, ranging from physics to chemistry to biology to psychology to sociology, such an undertaking may well be impossible. If so, it presents a very neat answer to the Fermi Paradox.

In respect of the Fermi Paradox, the lesson to be learned here is applicable to life and to investing. The weak assumptive link in the Fermi Paradox is the assertion of interstellar travel as a given. In Aurora, the author demonstrates to us the effect of being realistic and critical in a chain of reasoning. Asking the question why, and demanding an answer is imperative. And then tackling the question with multidisciplinary methods. As usual and often the case, these methods lead to fresh valuable insights.

In investing, constant stress test of the hypothesis is vital in order to avoid mistakes and the permanent loss of capital. Logically, our job would be much easier if we concentrate on a simple hypothesis, rather than one consisting of many moving parts whose cause and effect are unclear. This is one reason why I cannot do macro investing.

Stress testing of investing hypothesis has recently gotten us out of REF, although the final verdict on our decision remains unknown. The same exercise also got us out of PRG just in time before its implosion, and helped us steer clear of disasters such as VET and SGH. The absence of rigorous stress testing accounted for some of our losses, one of such being NWH, Stress testing continues to make us wary of XRO and MSB, although I could certainly see a bright future if things work out. Also very much of importance, continual stress testing of investment hypothesis has given us the confidence to stay with our winners, allowing us to reap the benefits of compounding a winning position.  Finally, stress testing of one investment hypothesis has also led us to better insights, resulting in a development of a much better, and currently profitable, hypothesis.

Another lesson from Aurora is the futility of detailed planning when one is dealing with complex and chaotic systems, and the serious importance of adaptability. From ship components breaking down due to physical stresses, the effect on biological cells due to changes in gravity, to the recycling of vital elements in a closed ecosystem, the ship engineer's continuing lament about the lack of foresight of the ship builders reminds me starkly of the futility of financial forecasting of complex economic systems. If we cannot be certain of the future, the best that we can do, and should do, is to prepare ourselves for a range of outcomes. This is where Graham's concept of Margin of Safety becomes relevant. The importance of adaptability is also a reason why we tend to focus on organisations that maintain maximum flexibility via low costs, low debt and high gross margins. Just have a look at the taxi industry in NSW, and the performance of CAB, for a bleak illustration of the consequence of a stubborn lack of adaptability.

Aurora also reminds us of what it means to be humans, literally speaking, and if you are metaphysically inclined, spiritually. As usual, parallels can be drawn with the investing world. Just as the existence of humans and the existence of Earth are arguably intrinsically inseparable, we would be ill-advised to view businesses in isolation from their ecosystems. Valuation from empirical data cannot be relied exclusively and separated from the business environment. A short cautionary note against blind and complete reliance on common metrics such as PE and PB.

Finally, the second level question: so what? Aurora deals with this admirably. Just as Charlie Munger wants to know where he will die, so that he never goes there, if we are being realistic and aware of the difficulties involve in interstellar travel and colonisation, we should be focusing more efforts on the difficulties rather than on the easy solutions such as physics and propulsion. It is certainly relevant in terms of Elon Musk's long term plans to colonise Mars.

Aurora attempts to bring us awarenesss of the possibility that interstellar travel and colonisation may well be an impossible undertaking. It points out that perhaps our existence as humans is inextricably linked to the existence and wellbeing of planet Earth. If this is so, it would be prudent on all of us to rethink our relationship with, and treatment of, what may well be our only home.

Enjoy and Prosper,
Yours One-Legged






No comments: